Canada Slow Inflation and Growth Signal Modest 4Q Rebound

Dec. 21 (Bloomberg) -- Canada’s slowest inflation rate in
more than three years and meager output growth signal the
fourth-quarter economic rebound will fall short of central bank
governor Mark Carney’s forecast.

The consumer price index rose 0.8 percent in November from
a year ago on a moderation in gasoline costs and a decline in
automobile prices, Statistics Canada said today from Ottawa.
Gross domestic product grew 0.1 percent in October after
stalling in September and shrinking 0.1 percent in August, the
agency said in a separate report.

The Canadian dollar and two-year bond yields extended
declines after the reports, which BMO Capital Markets deputy
chief economist Doug Porter said show that fourth-quarter
economic growth may be less than half the 2.5 percent the
central bank has called for. Carney reiterated Dec. 4 he may
raise his 1 percent benchmark interest rate even as central
banks in Japan and the U.K. have been easing.

“The combination of growth and inflation coming in slower
than expected means the Bank can maintain accommodative
conditions,” said Paul Ferley, assistant chief economist in
Toronto at Royal Bank of Canada. “Growth in the fourth quarter
is very modest, and certainly suggesting growth under the bank’s
2.5 percent.”

Inflation, which has run less than the central bank’s 2
percent target since May, is now outside the 1 percent to 3
percent target band. The November rate was the slowest since the
0.1 percent reading in October 2009 following the country’s last
recession.

Dollar, Bonds

Core inflation, which excludes eight volatile items, slowed
to 1.2 percent from 1.3 percent. Economists surveyed by
Bloomberg forecast that the total rate would be 1.1 percent and
core inflation would be 1.3 percent.

The Canadian dollar weakened 0.6 percent to 99.32 cents per
U.S. dollar at 4:15 p.m. in Toronto. One dollar buys $1.0068.
Two-year government bond yields fell two basis points to 1.11
percent, with the price of the 1 percent securities due in
February 2015 gaining 4 Canadian cents to C$99.78.

“Canada’s economy has slowed to a crawl, and another
roadside shock could conceivably push us into a downturn,”
Porter of BMO Capital Markets said in a telephone interview.
“But I think that’s very much an outside risk at this point.”

The economy will probably grow at a 1 percent pace this
quarter, Porter said, adding Canada is still at risk from the
prospect of more than $600 billion of U.S. tax increases and
spending cuts due next year unless Congress acts. Canada sends
three-quarters of its exports to its southern neighbor.

GDP Details

The Bank of Canada is relying on consumption and business
investment to lead an expansion over the next two years, and
forecast that growth would rebound after slowing to a 0.6
percent annualized pace in the July-September period on drops in
investment and shipments abroad.

Consumer confidence declined for a third month in December,
the Conference Board of Canada said today, with its index
falling by 2.4 points to 77.9 on increased pessimism about
future financial and job prospects.

Mixed Signs

Companies linked to household spending are showing mixed
signs about consumer confidence. Cadillac Fairview Corp. said
Oct. 23 it will spend C$350 million to expand the Sherway
Gardens mall in Toronto starting in January. Tim Hortons Inc.,
the biggest coffee and doughnuts chain in Canada, said Nov. 8
its third-quarter earnings were restrained by “continued
sluggish economic growth and fragile consumer confidence,
leading to constrained discretionary spending.”

The National Hockey League’s lockout and the cancellation
of games led to a 1.6 percent decline in arts, entertainment and
recreation. The industry’s C$10.7 billion contribution makes up
about 0.8 percent of the world’s 11th largest economy.

The spectator sport, performing art and heritage
institution category fell to the lowest in October since the
last NHL disruption in 2005. The sector’s output of C$4.91
billion was the lowest since May 2005 and down from C$5.72
billion a year earlier, or by 14 percent.

Mining excluding oil and gas dropped 0.4 percent, as
falling coal production outweighed increases in the extraction
of metals such as copper, nickel and lead. Manufacturing was the
biggest drag on growth in October, down 0.4 percent.

The next two monthly output reports would need to show
growth of about 0.6 percent to reach the central bank’s 2.5
percent forecast according to Krishen Rangasamy, senior
economist at National Bank Financial in Montreal.

“The inflation data confirms what the GDP data tells us
about the growing economic slack in Canada,” Rangasamy said.
“While that may not be enough to get the Bank of Canada to
remove its tightening bias, that will certainly reduce the odds
of rate hikes in 2013.”